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Risk premiums on some of the riskiest European structured finance securities have fallen back to pre-Lehman levels, in the latest sign of a revival in confidence among investors in the securitisation market.

London-based analysts at Bank of America Merrill Lynch said in a report yesterday that indicative yield-spreads on UK, Dutch and Spanish non-conforming residential mortgage-backed securities in the secondary market returned to pre-Lehman levels last month.

The performance broadens a trend, which has already seen spreads on most European prime, or high-quality, RMBS close in on pre-Lehman levels. Non-conforming RMBS are backed by high-risk mortgages originated by non-mainstream lenders.

According to the report, yield-spreads on UK non-conforming RMBS, for example, have dropped back to about 450 basis points, where they were before Lehman Brothers collapsed, from highs of around 800 basis points from March.

The broader credit markets have rallied hard since March, when investor sentiment hit its nadir. That has forced yield-spreads across asset-classes down from record highs and in most cases to pre-Lehman levels.

Structured finance spreads have lagged the tightening of other credit asset-classes, which have rebounded more keenly on the back of massive government intervention, largely because of the collapse in the traditional buyers of these securities.

However, investor demand for structured finance is slowly recovering, bolstered by government intervention and an increase in their appetite for risk and higher yields.

This has led to the re-opening of certain securitisation markets in the past few months.

Last month UK building society Nationwide launched a £3.5bn (€3.89bn) mortgage-backed securitisation, and in September Lloyds Banking Group’s sold £3.6bn of residential mortgage-backed bonds – the first such transaction since October last year.

The BofA ML analysts said: “Now that the re-run of the great depression has been avoided and the market is calling the end of the recession altogether, the question about the future – ‘normal’ – levels of structured finance bond spreads is being raised.”

They added: “In same way as the spread widening of late 2008 seems to have no ceiling, the spread tightening of 2009 seems to have no floor. Even though the spreads are rapidly tightening towards the pre-Lehman levels, they are still far off the tights of 2004-2007.”